5.2 Graduated Income Tax

Tax terms can be confusing, especially when considering gross income (see math help for page 203), adjusted gross income, and taxable income. Recall that gross income is all income from whatever source derived.

Adjusted gross income is gross income less allowable adjustments, such as individual retirement account contributions, alimony payments, and unreimbursed business expenses.

Taxable income is adjusted gross income less allowances for personal exemptions and itemized deductions.

Average Tax Rate is the ratio of the total taxes paid to the adjusted gross income.

The following spreadsheet shows the Average Gross Income (AGI), Income Taxes Paid, and the Average Tax Rate (or effective tax rate) for taxpayers by income level.

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Checkpoint Solution

The table shows the federal income tax to income earned ratio.

The more money you make, the more you pay in federal income taxes. This is how a progressive system is supposed to work.

Comments (4)

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You're very right - it would be difficult to support a family on that income.

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Guest7 years ago |

It's incredible that 50% of the country makes less than $33,000. There's a reason they pay little to no taxes - it's nearly impossible to live on that if you have any dependents.

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Ron Larson(author)8 years ago |

It is true that about half of the workers in the United States don't earn enough to pay federal income taxes. They do, however, pay Social Security and Medicare taxes on their incomes.

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Guest8 years ago |

The first graph in Example 3 is amazing. It's hard to believe that 50% of the people in the United States pay no federal income tax. No wonder politicians pander to the lower income groups. They are more likely to agreed to "raise taxes on the rich", as long as they don't have to pay any taxes.